An investment debate SA should have
If you’ve heard enough active managers wax lyrical about their fund’s inflation-beating returns or been reminded for the umpteenth time by passive managers that most active funds don’t outperform their benchmark, you’d be forgiven for thinking the underside of your mattress is the best place to stash your money.
The active-versus-passive investing debate obfuscates the most important elements of what makes one investor more successful than another: when they start saving and how much they save. Take two people who contribute the same amount and earn exactly the same return on their investment over a lifetime. One starts saving 10 years before the other. The power of compound interest means that person A’s extra contributions are compounded so that she ends up with twice as much as person B, despite only contributing 33% more.
How refreshing it would be if asset managers, instead of boasting about returns or fees, bragged instead about how many first-time investors they had signed on or how much more their clients were saving because of clever strategies to encourage this.
Yes, investment fees do matter and investors should interrogate their total investment charge. High fees, compounded over 40 years, will undoubtedly have a considerable negative effect on the amount of money you eventually end up with.
It is also true that active managers, which make regular changes to the construction of a portfolio, tend to charge more than passive managers, which construct a portfolio to track an index and then leave it to do just that.
But active manager fees have been falling, thanks in large part to the advent of passives. Equally, not all passive strategies are ultralow-cost. Vanilla strategies might be, in which securities that share common features, such as being in the Top 40, are lumped into an index to be tracked. But newer strategies, such as factor investing, require more active portfolio construction and come at a higher cost.
Fees, in turn, should be weighed up against investment returns. The research tells us that most active equity funds fail to beat their benchmarks, often explained by the effect of higher fees: if, as an active manager, you’re charging 1% more than your passive rival, you need to deliver at least 1% of outperformance just to be square.
Having said that, as more money flows out of active and into passive funds, treating superior and inferior companies alike, there are likely to be more opportunities for active managers to pick underpriced stocks and sell overpriced ones. In 2017, says CNBC, active fund performance has outpaced passive in the US and this trend is expected to continue.
There is no reason why investors should not be using a blend of active and passive strategies. In SA, a number of institutional investors are not using passive strategies at all. At the same time, there are highquality active managers that will prove their worth in the current sideways market.
In any event, what matters most in determining your eventual returns is how much you save and when you start. Start young, save as much as you can and pay a professional financial planner who can help you do this well. A debate worth having would be how the asset management industry can get South Africans to save more.